Event Trading Guide: Looking at the U.S. Dollar Index Ahead of CPI

All eyes and ears are on the U.S. CPI release this week!

Here’s what happened in the previous release, how USD reacted, and what’s expected this time.

What happened before?

• Headline CPI rose 0.4% m/m in Sept vs. projected 0.1% uptick
• Annual CPI dipped from 8.3% to 8.2% vs. estimated 8.1% figure
• Core CPI posted another 0.6% m/m gain in Sept vs. 0.4% consensus

Following strong inflation readings for August, the CPI report for September also blew market expectations out of the water.

Headline inflation rose 0.4% on a month-over-month basis, but the annual CPI dipped slightly from 8.3% to 8.2%. Meanwhile, the core CPI followed through with another 0.6% monthly gain versus the estimated 0.4% increase.

Components of the September CPI report revealed that higher costs of shelter, food, and medical care were the main contributors to the gains.

These were more than enough to offset the sharp decline in gasoline and energy prices during the month.

U.S. Dollar Index (USDX) 15-min Chart

Not surprisingly, the U.S. dollar popped higher across the board upon seeing these upside surprises.

After all, stronger inflation sealed the deal for another 0.75% Fed rate hike, which the central bank delivered this month.

What’s interesting is that the Greenback managed to return these gains (and more!) before the end of the trading session.

What’s expected this time?

• Headline CPI to climb from 0.4% to 0.6% m/m in Oct
• Annual CPI to dip from 8.2% to 7.9%
• Core CPI to fall from 0.6% to 0.5% m/m

Price pressures are expected to be a bit more subdued in October, even as the headline figure is still estimated to tick higher from 0.4% to 0.6% month-over-month.

The annual CPI figure is projected to dip from 8.2% to 7.9% while the core CPI could decline from 0.6% to 0.5%. Leading indicators such as the S&P Composite PMI reflected weaker price components for October.

Weaker-than-expected actual results could confirm that the Fed’s aggressive tightening moves are already starting to take effect, reinforcing the view that it’s high time to pivot.

Even main man Powell himself acknowledged that the committee could consider smaller rate increases next time!

The bottom line is that both headline and core CPI needs to start declining significantly if the Fed is going to pivot anytime soon.

Stronger-than-expected data, although unlikely, might spur yet another leg higher for the Greenback since this could revive hopes for another 0.75% rate hike.

US Dollar Index (USDX) 4-hour Chart

Looking at the U.S. dollar index shows that the currency is undergoing downside momentum. Dollar traders are likely taking the latest FOMC remarks into consideration and placing their bets ahead of the CPI release.

Technical indicators are looking mixed, with the moving averages flexing a fresh bearish crossover and Stochastic signaling exhaustion among sellers.

Either way, make sure you practice proper risk management when trading this one!